To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Dalekovod D.D's (ZGSE:DLKV) returns on capital, so let's have a look.
What is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Dalekovod D.D, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.075 = Kn29m ÷ (Kn906m - Kn520m) (Based on the trailing twelve months to September 2020).
Therefore, Dalekovod D.D has an ROCE of 7.5%. Ultimately, that's a low return and it under-performs the Construction industry average of 10%.
View our latest analysis for Dalekovod D.D
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Dalekovod D.D has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Can We Tell From Dalekovod D.D's ROCE Trend?
It's great to see that Dalekovod D.D has started to generate some pre-tax earnings from prior investments. The company was generating losses five years ago, but now it's turned around, earning 7.5% which is no doubt a relief for some early shareholders. In regards to capital employed, Dalekovod D.D is using 62% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.
On a side note, Dalekovod D.D's current liabilities are still rather high at 57% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
Our Take On Dalekovod D.D's ROCE
In the end, Dalekovod D.D has proven it's capital allocation skills are good with those higher returns from less amount of capital. And since the stock has fallen 30% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Dalekovod D.D (of which 1 is a bit concerning!) that you should know about.
While Dalekovod D.D isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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About ZGSE:DLKV
Dalekovod d.d
Engages in the engineering, production, construction, and installation of electric power facilities, facilities for road, railroad and mass transit, and telecommunication infrastructure in Croatia and internationally.
Flawless balance sheet and slightly overvalued.
